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Thatcherism: One foot in the grave?

On the 8th April, Britain said goodbye to their first female Prime Minister, arguably the most famous one since Winston Churchill. The reaction has been mixed to say the least, with Baroness Thatcher a bit like marmite; you either love her or hate her. On the positive side; she ended the trade unions grip on the country, reduced the high inflation rate, created a free market approach and helped retain Britain’s global influence at a time when other super powers were rising to the top. On the other hand, she helped divide the country even further, centralised power in Westminster, reduced public investment in infrastructure and hardly made a dent in the issue of equality. She also made a lot of enemies, in particular the mining industry, civil right activists and even her own party (who still suffer under her shadow).

But no matter what you think of her personally, her economy policies have had a lasting effect on the nation and the world as a whole. Her following loosely of the ideas of Friedrich Hayek was extremely brave when the rest of the world was dominated by Maynard Keynes ideas. The idea in general was to shrink the state and its effect on the country, thereby allowing the private sector to grow. When governments enter the markets they tend to crowd out private enterprises and mange sectors poorly, so Baroness Thatcher privatised big industries in transport and energy and eliminated state controls. This improved productivity in the nation and set off a trend of privatisation throughout Europe and the wider world. Germany fully privatised its national champion Volkswagen in 1988 while even France, a country that never fully caught on to privatisation, sold off shares in Renault in 1996 (though it still holds a 15% ownership to this day). In Eastern Europe and Latin America, privatisation became extremely popular, as it encouraged outward investment into the country that the governments couldn’t hope to create by themselves. In Poland between 1990 and 2004, 5,511 public owned enterprises were privatised, while Latin America keenly accounted for 55% of global privatisation in the 1990’s. Annual revenues from global privatisation as a whole peaked in 1998 at over $100 billion, showing the extent to which “Thatcherism” had an effect on the whole world in the aftermath of her term in office.

France privatized Renault, though they still hold a 15% stake.

Yet times do appear to be changing. The world-wide recession (a caveat of the free market economy Margaret Thatcher brought in) forced many governments to resume ownership of previously private industries, especially the banking sector. The UK government partly nationalised RBS in 2008 and now owns a majority 81% stake, Holland recently nationalised bank and insurance group SNS Reaal for €10 billion, Belgium nationalised their big bank Dexia in 2011 while Spain had to request almost €40 billion in bailout funds for its four nationalised banks late last year; Bankia, Catalunya Banc, Banco Gallego and NCG Banco. This isn’t all, in South America, a region so keen on privatisation, the trend is also reversing. Argentina last year took a majority 51% stake in YPF (an oil company) without giving its parent company Repsol (a Spanish Company which held 75% of YPF) a cent. YPF aren’t alone, Ms Fernandez (Argentina’s President) also nationalised their private pension funds and a large airline, with the latter flagging (44% of Aerolíneas Argentina’s flights were not running on time last year). If it weren’t enough for Spain to lose YPF, they also lost another company to a South American President. Evo Morales, President of Bolivia, nationalised their national power grid company of which a majority was owned by a Spanish company. Mr Morales has at least in the past offered remuneration, though often it has been below free market levels. Finally there is Venezuela, who suffered their own loss of a famous leader, Hugo Chavez. The dominant leader was beloved by his public and encouraged national patriotism by nationalising large parts of the economy. But this is possibly the worst example of nationalisation. Mr Chavez employed only those loyal to him in powerful state positions, rather than those best for the job. He gave cash handouts to the population but has had one of the worst records in the region for lifting people out of poverty.

Another fallen political leader leaves behind another controversial legacy

Margaret Thatcher was a willing accomplice to globalisation, which has seen trade explode between nations and barriers broken down. So she would be sad to see that the WTO has cuts projections for trade this year down from 4.5% to 3.3% due to increased squabbling over trade restrictions, while protectionist policies in some studies have been suggested to have increased by 36% in 2010/11. The financial crisis’s long lasting consequence has been the setback in the expansion of integration within the world, with countries now moving towards protectionist policies more and more. In the recent EU budget talks for example, one of the few areas not to be discussed were Frances protected agriculture subsidies (where tariffs on non-EU goods have known to reach 156%). Then there was the decision by Brazilian President Dilma Rousseff to increase Industrialised products tax by 30% in 2011 for vehicles where 65% of the value added did not originate in Brazil, despite breaking WTO rules.

More worryingly, the biggest trade zone right now is facing big doubts over its future. The EU is the biggest backer of free trade in the world, so if it were to break up, it would set the world back years. The lack of tariffs and trade caps between EU nations majorly simplifies the whole process, reducing the red tape that clogs up businesses and increasing the number of options open to the consumer. The percentage of trade in EU states between each other is falling sadly, with Germanys decreasing by nearly 10% since before the financial crisis (though there are other contributing factors). The single market also bizarrely does not include services, which account for around 71% of EU GDP but only 3.2% of intra-EU trade.

Thatcherism however is hardly dead. Free trade deals that many thought were long gone are starting to pop up once again. The EU and USA are discussing a “transatlantic trade and investment partnership”, which could according to some estimates boost GDP in both regions by between 0.5-1% to perhaps even triple that, depending on the amount of restrictions reduced. Tariffs only average about 3% between the regions, but other barriers to trade are aplenty and go a long way to restricting trade. Additionally there are the Trans-Pacific Partnership talks between the North American and South East Asian regions. The aim is to cut trade restrictions between 11 nations, including; USA, Mexico, Canada, Japan, South Korea, Vietnam and Australia. The countries involved account for around 30% of global trade and could improve the economies GDP’s by an estimated 1%. Neither deal is even close to being finished, but they both bring hope to the idea of free trade that Margaret Thatcher helped popularise in the 1980’s.

After the global recession, many criticised the free market approach as the main cause for the financial crisis, but the easy excuse isn’t always the right one. A free market doesn’t have to result in a lack of regulation and poor preparation, which were the real causes for the banking crash. A balance is needed for it to work, free market policies used along with guidance (not interference) from the state.

Baroness Thatcher may have passed on, but her free market policies are still alive and kicking.

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3 thoughts on “Thatcherism: One foot in the grave?”

Regarding privatisation there’s a difference between public management and public ownership. Public management has been much maligned with accusations of nepotism, cosy unions etc. In theory it’s bad and every enterprise should be managed as a for-profit private business. Private management does bring some improvement in customer service, if only by making the firm appear to care for customers. On the other hand I haven’t seen private management make a notable improvement on natural monopolies such as British Rail or the power utilities. Ex monopolies BT and BA are still terrible.

I’d say I mostly agree with private management but it’s not a night-and-day difference. You trade corruption for other principal/agent problems.

Private ownership on the other hand is clear cut: It’s a choice between holding the cash flows, risks, and capital gains of industry in a public fund where they can be shared democratically among the current generation, or holding them in private funds that people can buy into or out of and thus achieve a unique and heritable outcome for each family. Private ownership is about enabling inequality and nothing else. During the glorious sleight to privatisation the public has been stripped of its investment fund and asked to buy it again privately.

There are also second order effects. Pressure is constantly on to remove taxation and replace it with dividends as a means to distribute surplus in the economy, which would be a good thing if ownership were more equal. Lack of state ownership means that the state can’t compel firms to accept its currency, which is a low probability but high impact monetary risk. A norm of shedding state assets yields a principal/agent problem where they’re systematically underpriced and routed to insiders.

Private ownership is overwhelmingly bad, or at least overwhelmingly unequal. We can have the benefits of private management with public fund ownership.

You make some great points pavlos, though i would argue your ideally talking about big businesses. If competition rules were increased and made to split these up into smaller competing firms then the problem of only a few retaining the majority of gains wouldnt be such an issue.
On natural monopolies I would agree there is still some problems. But I do believe they have better run ie train services in European countries.

Kane Prior

My name is Kane Prior and I like to write about economic issues from around the World. I am a graduate from the University of Kent with a 2.1 degree in Business and Economics. I hope to use this blog to gain interest in myself and maybe lead to some potential career someday. If you want to contact me I am on Twitter (just click on the image) and if you have any writing opportunities for me, then please feel free to drop a message.

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